Before PBMs and payers open the champagne for simvastatin's new lower pricing, they should consider the possible long-term effects on their business model if other pharmaceutical manufacturers decide to zocor their generic competitors.

Let's look at the winners and losers from this week's news.

Teva and Ranbaxy: Losers

Patents grant market exclusivity for a limited period of time, providing pharmaceutical manufacturers such as Merck with incentives to innovate by allowing them time to recoup their investment in R&D. The Hatch-Waxman Act provides an analogous 180-day period of marketing exclusivity for the first generic drug manufacturer to file an Abbreviated New Drug Application (ANDA).

Merck's pricing strategy now makes the 180 day exclusivity periods enjoyed by Teva and Ranbaxy worth a lot less. As the WSJ notes, "Merck's pricing strategy could set off a bidding war among generics manufacturers, which likely will have to slash their prices to maintain a foothold in the market for simvastatin, the generic name for Zocor."

Dr. Reddy's: Loser

Dr. Reddy's, whose authorized generic launched on Friday, will now end up with a lower market price than they expected when they signed up. I wonder how Merck's "partner" feels about this!

Merck: Winner

Unlike Merck's strategy, empirical research has found that pharmaceutical manufacturers typically increase prices after generic entry. (Click here to download a classic article on the topic.) This is a price discrimination story. Physicians or patients who are loyal to the brand are also less price sensitive, so the counter-intuitive, but logical, strategy is to extract as much revenue as possible during the period of generic penetration.

By pursuing the opposite strategy, Merck is accelerating the loss of sales for a $4.4 billion blockbuster. Since they would have lost the sales anyway, they get to capture extra revenue dollars that would have gone to the generic manufacturer.

PBMs: Winners or Losers?

The short-term effect of Merck's move is clearly beneficial because the market price of simvastatin will decline faster, consistent with FDA research showing a correlation between more generic competition and lower prices relative to a brand. Thus, PBM stocks rallied this week after falling in May when the original 180 day exclusivity period was announced.

However, the real risk comes from the long-term competitive effect on future ANDA filings. Will generic manufacturers be deterred in the future by the threat (real or implied) that the brand name competitor will reduce the value of the 180-day exclusivity period?

The FTC is currently studying the alleged anti-competitive effects of authorized generics such as Dr. Reddy's simvastatin. From the FTC's Federal Register notice in March:

"Many generic manufacturers assert, however, that in the long run, consumers will be harmed because an expectation of competition from authorized generics will significantly decrease the incentives of generic manufacturers to pursue entry prior to patent expiration. For a generic manufacturer, the additional competition from an authorized generic may result in significantly less profit during the period of 180-day exclusivity than if the generic manufacturer had no authorized-generic competition during that time."

PBMs have been able to deliver substantial value to payers through generic substitution and estimate that each 1 percentage point increase in generic fill rate decreases plan sponsors' pharmacy spend by 1 percent. (Click here for more details.) Gun-shy generic manufacturers will do long-term harm to PBM's ability to keep delivering savings.

So, is a dollar of savings today worth more than the chance that there won't be a dollar tomorrow? This is the real unknown behind Merck's strategy. I'll reserve public comment until I see the FTC's report.

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